Small Business Policy Index 2018: Economic Reality vs. Political Fantasy

By at 20 February, 2018, 6:30 pm

by Raymond J. Keating-

When it comes to taxing and regulating businesses, there seem to be two types of politicians.

The first type believes that no matter how many tax and regulatory burdens are tossed onto the backs of businesses, entrepreneurship, investment, working to expand a business, economic growth, and hiring will simply go on largely unabated.

The second type sees that taxes and regulations raise costs, create disincentives for productive activity like working, entrepreneurship, investment and growing a business, and distort decision-making. These elected officials understand that the policies they choose to impose have actual consequences in the marketplace, including affecting economic growth, competitiveness, and where people live and seek opportunity.

It is the second type that deals with economic reality, while the first type simply chooses to make policy in a kind of political fantasy world. It never turns out well in life, however, when reality is ignored in favor of fantasy.

The “Small Business Policy Index 2018: Ranking the States on Policy Measures and Costs Impacting Entrepreneurship and Small Business Growth discards political fantasy in favor of economic reality. It ranks the 50 states according to 55 different policy measures – 27 are taxes or tax related, 20 relate to rules and regulations, 5 focus on government spending and debt issues, and the 3 remaining gauge the effectiveness of important government undertakings.

Top Policy Friendly States for Small Business

In terms of the results, the most entrepreneur-friendly states on the “Small Business Policy Index 2018” – that is, those states where policymakers seem more focused on economic reality – are: 1) Nevada, 2) Texas, 3) South Dakota, 4) Wyoming, 5) Florida, 6) Arizona, 7) Washington, 8) Indiana, 9) Ohio, and 10) Utah.

Least Policy Friendly States for Small Business

Meanwhile, the states indulging in the political fantasy that policy doesn’t matter create climates unfriendly to entrepreneurship, small business and investment. The bottom 10 are 41) Maine, 42) Oregon, 43) Connecticut, 44) Iowa, 45) Vermont, 46) Minnesota, 47) New York, 48) Hawaii, 49) New Jersey, and 50) California.

Policy Matters

In case any doubts linger about the economic impact of policymaking, the Index includes an extensive review of economic literature pertaining to the effects of taxes, regulations and more. The various studies highlighted confirm, for example, that taxes and regulations have negative effects on economic performance, including economic growth, entrepreneurship, migration, investment and productivity.

It’s not surprising then that the top half of the states ranked on the “Small Business Policy Index 2018” perform better overall compared to the bottom half in key measures. As noted in the report, consider the results in three areas:

● State Economic Growth. Real average annual economic growth from 2010 to 2016 among the top 25 states ranked on the 2018 ‘Small Business Policy Index’ averaged 1.77 percent, which was 23 percent faster than the 1.44 percent average rate for the bottom 25 states. So, on average, economic growth performed markedly better during this poor recovery among the top 25 states on the Index compared to the 50-state average (1.60 percent) and compared to the bottom 25 states.”

● Population Growth. The top 25 states ranked on the 2018 ‘Small Business Policy Index’ averaged state population growth of 6.09 percent from 2010 to 2017 versus only 3.17 percent for the bottom 25 states. That is, the average growth rate was 92 percent higher among the top 25 states versus the bottom 25 states. In terms of total population numbers, the top 25 states saw an increase in population of 11.29 million from 2010 to 2017 versus a gain of 5.0 million in the bottom 25 states. The growth among the top 25 states in terms of total population was 7.09 percent, which was more than double the 3.34 percent for the bottom 25 states.”

● Population Movements – Net Domestic Migration. Perhaps most telling is net domestic or internal migration, or the movement of people between the states, that is, excluding births, deaths and international migration. It clearly captures people voting with their feet. From 2010 to 2017, the top 25 states on the ‘Small Business Policy Index’ netted a 3.15 million increase in population at the expense of the bottom 25 states, which lost 3.18 million (with the District of Columbia’s gain explaining the difference). For good measure, among the bottom 25 states, 18 lost population to other states, and the bottom 8 states all suffered negative domestic migration.”

Yes, no matter what the peddlers of political fantasy might claim, economic reality tells us that policy – at all levels of government – matters. That is made clear by SBE Council’s “Small Business Policy Index 2018: Ranking the States on Policy Measures and Costs Impacting Entrepreneurship and Small Business Growth.”


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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